How much further do pharmaceutical stocks have to fall?I’ll tell you with a regression line, maybe 20 percent

2022-06-13 0 By

Medicine this time down can be described as a crying Wolf.A lot of small scattered unexpectedly also fell, while constantly add cang.Many big Vs on the Internet are actually irresponsible.In plummeting market, cannot add cang, be covered dead to the time, can install dead to accept fate only finally.So the question is, how much longer can pharmaceuticals go down?Where does it fall?It’s not that hard to get back to that.Today, I will continue the killing of the pharmaceutical industry and introduce the theory of mean reversion.With this method, you can do the heart value, holding base not panic!One, how does the long-term yield rate of investment stock calculate after all?Warren Buffett said that your long-term return on stocks is equal to the ROE of your company.(Return on equity) Please note that we are talking about long-term returns.The longer you go, the closer you get to ROE.If we invest in the S&P 500, for example, the long-term return is 8%-12%.Investing in the CSI 300 index is about the same.Because the ROE of both of them fluctuates in this range.But it is worth noting that Buffett invests in industries, mainly consumer and financial.So this principle works best for industries and companies with stable earnings (including broad-based indices).Sectors like technology and cyclical stocks, where earnings have bounced up and down, are hard to measure this way.It just so happens that medicine, an industry with stable profits and little impact on the economic cycle, fits this approach.Now let’s talk about medicine.The following chart shows the ROE trend of the pharmaceutical industry over the past 21 years.There are four characteristics: 1. Before 2007, the ROE was only about 6%, the industry was in a period of disorderly development, and the medical insurance system was not sound;2. From 2007 to 2017, the ROE remained above 10%. The industry achieved explosive growth due to the increasing demand, higher medical insurance income than expenditure and lax regulation.3. After 2018, ROE fell below 10% and even less than 8% in 2019 and 2020!Due to the economic downturn and increased pressure on medical insurance, the government began to strengthen efforts to test the water of centralized procurement and medical insurance cost control.4. In 2021, ROE rebounded due to the low base of the previous year and the interference of the epidemic, but the industry fundamentals have changed and ROE rebound cannot be sustained.So let’s see what happens to the stock price as ROE changes.See below.There are five characteristics: 1. Before 2007, ROE was low, stock prices kept falling, and they were not favored by the market at all;2. From 2007 to 2015, with the increase in ROE, the stock price increased by 6 times;3. After the stock market crash in 2015, the ROE continued to decline and the stock price rise was restrained. In 2018, when the ROE fell below 10%, the stock price dropped by more than 30%.4. In 2019, the stock price began to rise with the economic recovery. In 2020, when the epidemic hit, the ROE was less than 8%, but the stock price rose unrationally driven by emotion.5.2021 years, due to the low base of the previous year, plus bonus (export and vaccines) outbreak, ROE rebound, so medical rebound after a wave of the decline of the Spring Festival, then, because everyone is aware of the high growth unsustainable as well as in the crackdown, share prices downward spiral, has dropped to 30% in summary, the shares of the pharmaceutical industry is associated with ROE is strong.Third, where will medicine fall?That’s what everyone is most concerned about.We learned in high school that prices move up and down around value.The stock price is the price, and to figure out where the price is going to end up, I have to figure out the value, and the value is the mean regression line.The value of the pharmaceutical industry can be measured in ROE.Over the past 21 years, the industry has experienced ups and downs, and the average ROE should be between 10% and 12%.We calculate two extremes to determine the downside.In 2000, the point of the pharmaceutical index was 1108, and 21 years later it would be 8199 based on 10% annualized growth. So let’s draw a mean regression line from 2000, as shown in the chart below: The chart shows very clearly that stock prices move up and down along this regression line.As long as the deviation is too big, it will return!This is common sense!!And this is what I always tell you, when I buy a stock or a fund, I calculate where it’s going to go in the most pessimistic and optimistic scenarios.After buying, as long as did not rise to my calculation of the selling point, I will lie motionless, no matter how he fluctuations can not lure me.And once exceeded the most optimistic price, that this time is the crowd in the madness.I will go mad and gather more wool from the crowd’s folly.But I’ll keep my head above water and not actually go crazy.This is the heart of value, holding not panic.Go back and look at medicine.It is now 10294, a 20% drop from 8199!Are you scared?In fact, the decline may be more than that, for two reasons: First, the fundamentals of medicine have changed, it is difficult to maintain 10% ROE for at least the next three years, and it is estimated that even 8% can not be maintained!Then, the reasonable share price is certainly lower than 8199!Second, once the slump starts, there is likely to be a stampede, and the mood of the public shifts from extreme optimism to extreme pessimism, and share prices will be driven very, very low.Don’t forget the painful price of the Internet!This is the pessimistic algorithm, but let’s see what happens in the optimistic case, right?2. Draw the mean regression line with ROE=12%, and the point after 21 years should be 11970, as shown in the figure below: Judging from this figure, I personally think this mean regression line overestimates the average annual ROE of medicine.But that’s an optimistic scenario.At this point, the graph shows that medicine has fallen 31%!However, if we consider that the ROE of medicine in the future is less than 8%, then the current position can only be called reasonable, not underestimated.From an investment point of view, we should consider the margin of safety in any decision we make.So, I prefer not to do it now.If we get a few more mines this year, our estimates will have to move down.Let the bullets fly a little longer.Four, when can medicine rise back?This can also be approximated.For example, if a company’s stock price is 100 and its long-term ROE is 15%, it will be 200 in five years, doubling its profit.If the stock price is down to 50 because it was mistakenly killed, it’s a real bargain, and in five years it’s going to have to quadruple.And maybe there’ll be a bunch of idiots chasing after them, and the valuation will be so high, I’ll just pull the wool.This is my investment values, the wool is placed in front of me are not collected, that is not insane?But on the contrary, many small scattered, always in no margin of safety when to bet, but also more than loss, continue to fill positions.It’s really bad to be fooled by the online cheater Big V.Interested friends can calculate on their own under optimistic and pessimistic scenarios, medicine will probably return to the previous high.Please attach great importance to it. If it goes down by 50%, it can only go back up by one time; if it goes down by 30%, it can only go back up by 43%.Make sure you know how long it will take, based on 10% ROE.Prices fluctuate up and down around value. This is called mean reversion.In the stock market, this is immutable common sense and law, please do not ignore.For industries and companies with stable profits: 1. We can use ROE as value anchor and draw the mean regression line; 2.2. Judge whether it is overvalued or undervalued by referring to the mean regression line, and define a margin of safety for your investment;3. Draw two boundaries with optimism and pessimism. When we are extremely pessimistic, we should step on it. When we are extremely optimistic, we must keep sane and don’t go crazy, otherwise we will become crazy!If you feel good, give a reward, 1 cent is silent support, ha ha!Like my article friends welcome to my namesake public number: Rui Zhi Rui see!The content above is richer still made classification, see finance and economics together, learn to invest!